What is covered by an option to tax?

16th Sep 2019
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Andrew Needham looks at a potentially tricky VAT issue.

When businesses opt to tax a property, there is often confusion as to what exactly is covered by the option and how far it extends. 

Option to tax – the basics

Opting to tax a property turns an exempt supply into a taxable supply so you can recover the VAT on any building or refurbishment costs. 

The option to tax only applies to land and commercial property and does not apply to residential property or to residential parts of a mixed-use property.

Opting to tax land

For VAT purposes, the term ‘land’ includes any buildings on that land, so if you opt to tax a piece of land it will include any building on it and any buildings constructed on it in the future.

If you wish to exclude a newly constructed building from the option to tax on a piece of land that you have previously opted, you can do so by informing HMRC using a form VAT1614F. If you wish to opt to tax it at a later date, you can do so by asking permission from HMRC using a form VAT1614H.

Your option to tax will cover the discrete area of land that you specify and will not affect any adjoining land.

Opting to tax a building

Most businesses that opt to tax tend to opt to tax a building. However, it must be remembered that if you specify a building, the option to tax will continue to apply to the land on which the building stood if the building is demolished, and to any future buildings constructed on the land.

The option to tax will cover the whole of the building, and the land under the building and within its curtilage (the land immediately around the building including, for example forecourts and yards). If your interest in the building is restricted to one floor, your option to tax will still cover the remaining floors of the building, so if you ever acquire other parts of the building your option to tax will extend to those parts.

If the building stands in a large area of land, the extent of the curtilage (or how far the option to tax extends over the land) depends on how far the services of the building can be utilised. 

If you opt to tax a building and you extend it at a later date (upwards, downwards or sideways), your option to tax will apply to the whole of the extended building.

Linked buildings and complexes

Usually, it will be clear what constitutes a ‘building’ (for example an office block or a factory). However, in some instances the law treats more than one building as being a single ‘building’ for the purpose of the option to tax. These include buildings that are linked, or if not yet built are planned to be linked. A link would include internal access by a covered walkway.

A link does not include:

  • a car park, either above or below ground
  • a public thoroughfare
  • a statutory requirement, such as a fire escape
  • a complex consisting of a number of units grouped around a fully enclosed concourse, such as a shopping mall or an industrial or business ‘park’

If, prior to their completion, buildings are linked by an internal access or covered walkway, they are treated as a single building and an option to tax will apply to both parts.

If a link is created after both buildings are completed, the option to tax will not flow through with the link.

Practical tip

If you decide to opt to tax land or buildings, make sure you know the extent of the option and what you can and cannot exclude from it.

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